Scratch beneath the surface and you’ll quickly discover that there’s something else going on with the so-called “retail apocalypse.”
New research examines consumer economics to uncover the realities driving retail today, while insiders at SXSW explain what’s now needed to create a compelling and customer-centric commerce experience.
Deloitte Insights’ report, “The great retail bifurcation: why the retail ‘apocalypse’ is really a renaissance,” sets out to expose the truth about what’s been happening in the industry over the past several years. Grouping consumers into low, middle and high income brackets and retailers into the categories “premium,” “balanced” and “price-based,” the report came to some telling conclusions about the state of retail in 2018.
“Analyzing the industry through a consumer value lens highlights trends in a granular way and brings actionable strategic opportunities to light,” the report noted.
To understand consumers, follow the wallet
Focusing on data between 2007 and 2016, Deloitte detailed a number of facts concerning income across demographics. High earners fared disproportionately well over this time period; between 2007 and 2015, 100 percent of income growth went to top 20 percent, according to the report. What’s more, in 2016 alone the top 20 percent’s income grew 1,425 percent more than low earners.
By contrast, Deloitte refers to 2007-2016 as the “lost decade” for the 80 percent of consumers whose financial situation generally worsened. In 2017, low income individuals’ non-discretionary spending on costs including food, housing and transportation totaled 107 percent of their budget, which jumped to 123 percent in 2016. Over that period non-discretionary expenses like healthcare and education have risen 64 percent and 41 percent, respectively.
And over the 2007-2016 period, consumers of all incomes have had to contend with a new expense: mobile phones, plans and data, which posed a much more modest cost a decade ago. Like everything else, lower income consumers bear a heavier burden with smartphone expenses, which total 3.6% of their budget on average, compared with just 0.7% for high-income individuals.
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Against that backdrop, Deloitte examined how consumer economics correlated to shopping behavior. While those with lower incomes shopped in brick-and-mortar stores more often (58 percent), those with great disposable income preferred shopping online (52 percent). What’s more, individuals with smaller bank accounts were 44 percent more likely to shop at convenience stores, department stores and supermarkets—retailers then typically offer a one-stop-shopping experience. On the other hand, the high earners shop around a lot online; in fact they’re 40 percent more fragmented on e-commerce than low-income folks. Perhaps this is because deeper pockets equals greater choice?
Who’s struggling and who’s surging?
Turning its attention to retailers, Deloitte discovered that businesses at polar ends of the value spectrum significantly outperformed their middle-of-the-road “balanced” peers on every metric evaluated. Premium retailers’ revenue soared 81 percent and priced-based revenues grew 37 percent over the past five years, compared with a meager 2 percent growth for balanced retailers, according to the report. That scenario is only accelerating; in the past year, balanced retailers’ revenue declined 2 percent, while premium and price-based grew revenue by 8 percent and 7 percent apiece.
According to Deloitte, balanced retailers also lag in return on assets (4.6%), significantly trailing premium retailers (8.88%) and priced-based peers (8.2%), which elucidates the “retail apocalypse” store-closing storyline that’s been so prominent in the media as underperforming locations are divested to reverse fortunes.
The picture is much rosier for premium and price-based retailers, however, which are padding their store fleet. Over the 2015-2017 period alone, price-based retailers opened 264 locations, and for every balanced retailer store closing, price-based retailers add 2.5 stores, Deloitte found.
Moreover, shoppers with both premium and priced-based retailers were more likely to recommend these businesses than those shopping the balanced businesses, perhaps indicating these retailers are better aligned with changing consumer needs and preferences.
In short, this bifurcation points to a retail industry “in the midst of change, not collapse,” the report said.
A word on millennials
In the course of investigating consumer behavior and economics, Deloitte stumbled upon some key insights on the millennial cohort. Despite all the hype and hand-wringing over these consumers and their perceived disruption, Deloitte’s research revealed that their behavior and affinities, like other generations’, are overwhelmingly driven by income group rather than age. Seventy-nine percent of low-income millennials tend to shop brick-and-mortar stores, similar to the 81 percent of other generations’ low-income consumers, for example.
High-income millennials are likely responsible for the prevalent stereotype of the millennial consumer-disruptor, however, they represent just 19 percent of all millennials and a mere 6 percent of the total U.S. population, the report said. Note that the millennial cohort is consistent in one interesting way; regardless of income, they’re 6.4% less likely to shop in a department store than other consumers.
Insights from SXSW: Learning from digitally natives startups
Much of the conversation on the so-called retail apocalypse points to e-commerce and digitally native direct-to-consumer startups as among the main culprits driving the demise of many physical stores. The truth is far more nuanced, according to Michelle Bacharach, founder and CEO of FINDMINE, an AI-driven content automation platform that helps apparel brands show consumers how to use their products (think: complete the look).
The digital-first brands moving into brick-and-mortar aren’t successful necessarily because they launched online without physical assets, although that helps; the real reason they’re thriving is because from day one they maintained an ethos of being “scrappy and lean and nimble and able to iterate quickly,” Bacharach said at the “Retail Transformation: Apocalypse or Renaissance?” panel at SXSW.
While traditional legacy retailers bemoan their multi-year, multi-million-dollar leases, afraid to replace the buildouts they sank so much money into, the digital native natives are having none of that. “They can negotiate short-term leases or afford the comparatively low cost of pop-up shops to get in front of the right consumers, she added.
“They abandon bad ideas really quickly, are constantly testing and learning, and doubling down on good ideas,” Bacharach added. “Traditional retailers were never able to build that ethos into their organization.”
Matt Alexander, founder and CEO of Neighborhood Goods, thinks many retailers sat on the sidelines of technology and innovation for far too long.
“Purely the action of experimenting and trying is good. Everyone pretty much sat still for 20 years, and what we’re seeing now is a lot of people coming in and catching up to what could have been done,” Alexander said. “The technology you’re going to see rolling out into stores is not particularly innovative at this point.”
Bacharach said many traditional retailers struggle to provide frictionless customer experiences. Pointing to the experience of returning an item at Macy’s, she described how much better the process would have been if the department store had done something even as low-tech as giving her a numbered ticket so she could have shopped around and purchased additional products instead of waiting in line.
Though “personalization” and “customization” have been a key focus for many retailers, both Bacharach and Alexander expressed concern over this tactic. Personalization is not a “be all, end all.” Retailers that personalize too much aren’t offering their brand perspective, and they risk losing out on providing that aspirational element and point of view to shoppers, Bacharach explained, adding that personalization is “overhyped.”
“You compete away your only competitive advantage against Amazon,” which probably carries the same product and can ship it cheaper and faster, Bacharach said.
Alexander shared a similar perspective. “Customization is a euphemism for how relevant the experience is,” he said.
Though it’s unreasonable to suggest a legacy retailer could simply abandon sprawling investments and assets overnight to better compete against the nimble new breed of consumer-centric brands snapping up market share, Bacharach urged these companies to be radical instead of reactive.
“Divest yourselves of the people holding you back from innovation,” she concluded.